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How we got to today's RE market.
What does it mean to be in the housing market post COVID?
Most of us remember where we were when it became clear that COVID-19 was truly a global issue that would affect Americans. The call for shutdowns came rapidly and started first with municipalities, then states, and pretty soon most of America was locked down in quarantine. As someone who is always tapped into the residential real estate market, one of my first questions was what would happen with housing prices. Would the pandemic induce a decline in demand? What new housing trends would surface? And, in general, what would happen to prices? The reality of what happened is something that few would have expected, and since the pandemics started, the trends have been a general de-urbanization and a rise in prices. Why are prices up, and why are people moving out of cities? The answer is in surprising factors that have had a massive effect to both supply and demand in housing and that have come to define the real estate market of today.
Let’s go over some of these factors in detail.
Demand Side Factors
First is simply the new lifestyle realities that we’re faced with. Teleworking, social distancing, and at-home entertainment has driven up the demand for housing that supports a home-office, self-contained lifestyle. An urban condo or apartment within walking distance to the work office no longer has the same appeal when offices are largely boarded up and along with other urban amenities. A larger house with an office and a nice yard does. The “death of the suburbs” that people were so sure about only a few years ago has completely vanished, yielding instead to a renaissance of suburban and rural living. All this has driven new demand for moving into more suitable quarters for a post-pandemic lifestyle.
Also factoring into housing demand are the micro-economic factors of saving rates and income growth. Savings rates are up significantly, and for the first time ever, Americans have seen an increase in their income through a recession. Many individuals and families who would have spent five or ten grand travelling in a normal year suddenly find themselves with extra cash to put towards a down payment. In the month of March 2020, the savings rate hit an unprecedented 33.7% and even today, at 13.6%, is higher than it has been since the mid-seventies. Others have benefited from the government stimulus programs, either directly or indirectly, driving up their income as a result of the pandemic. Contrary to what many would have expected, a large segment of the population (one from which, as a startup founder, I’m regrettably excluded from) has seen their purchasing power increase through the pandemic. This has led to an all-time-high for median personal income, at $56.5K, and more income means a higher willingness to pay. It’s true that at the same time, housing credit has tightened, but for those in the market, purchasing power has gone up from savings and higher incomes.
And to finish of the demand side of the story, there are macroeconomic effects in play, namely slashed interest rates. If there’s one thing we can be sure of, it’s that when interest rates go down, prices go up. So what would we expect when interest rates go down by 1% in 6 months? For a given price, about a 10% reduction in your monthly payment. Anyone still surprised why prices are up?
Supply Side Factors
To drive the point further, housing supply has also collapsed due to several factors. The CARES Act placed a moratorium on foreclosures, which has dried up of the foreclosures market. To be precise, the current supply of foreclosure properties is down by 78% from last year. That means that for every 5 foreclosed properties entering the market last year, today there is only 1. Further compounding the housing shortage, many who are nervous about the pandemic have put off moving, adding to the share of the housing stock that is frozen. And finally, the pandemic has created turmoil in supply chains, making it more expensive to build new housing. So what you’ve seen happen to the price of toilet paper is also being reflected in the price for materials to build new homes.
The Bottom Line
So what does this mean for you? Well, as a buyer, it means that it’s going to cost you more to buy a home today than it did earlier this year, especially if you’re looking in the suburbs. Some suburbs, like my beloved Lake Oswego, OR, have seen over 25% increases in median home prices. However, if you’ve always wanted to move to San Francisco or New York City, there’s a chance to do so at a steep discount. As a seller, the current trends mean that it’s likely that you can sell your property for top dollar. Whether the market continues to keep going up remains to be seen. As we’ve already seen during the course of 2020, the market can be swayed by things that are quite hard to predict. So don’t make your decision about price trends, and don’t get caught up in what properties were going for last month. If you have a good reason to buy or sell, then go for it. Personally, as a buyer I’m keeping my eyes open and am not letting the prices of yesterday get in the way of my motivation as a buyer.